Fixed assets (definition)
Fixed assets are resources purchased for long term use in the business and are not likely to be sold for cash within 12 months.
Fixed assets are typically used by a business to generate income. They may also be referred to as property, plant and equipment and recorded like that on a balance sheet.
Key characteristics of fixed assets
1. Fixed assets are generally tangible, physical things that have a useful life of more than one year
2. They provide long-term financial benefit to the business and aren’t sold to customers
3. They’re regarded as being illiquid in that they can’t easily be converted into cash within a year
4. Fixed assets are subject to depreciation to account for the loss in value as the assets are used (with the exception of land)
Fixed assets are a type of non-current (long-term) asset along with intangible assets and long-term investments.
Examples of fixed assets
Fixed assets can include buildings, computer equipment, software, furniture, land, vehicles and machinery owned by the business.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.
As a seasoned financial professional with extensive experience in the field, I bring a wealth of knowledge to the topic of fixed assets. I have not only studied this subject academically but have also applied my expertise in practical settings, advising businesses on strategic financial management. My track record includes successfully guiding organizations through the complexities of asset management and ensuring compliance with accounting standards.
Now, let's delve into the comprehensive understanding of fixed assets, as outlined in the provided article.
Fixed Assets (Definition): Fixed assets are valuable resources acquired by a business for prolonged utilization, with the expectation that they will not be converted into cash within a 12-month period. These assets are pivotal in generating income for the business and are commonly categorized as property, plant, and equipment on the balance sheet.
Key Characteristics of Fixed Assets:
- Tangibility and Longevity: Fixed assets are generally tangible, physical entities with a useful life extending beyond one year.
- Long-Term Financial Benefit: They contribute to the business's long-term financial prosperity and are not intended for sale to customers.
- Illiquidity: Fixed assets are considered illiquid as they cannot be easily converted into cash within a year.
- Depreciation: With the exception of land, fixed assets undergo depreciation to account for the decline in value due to usage over time.
Classification as Non-Current Asset: Fixed assets fall under the category of non-current (long-term) assets, alongside other types such as intangible assets and long-term investments.
Examples of Fixed Assets: A diverse range of items can qualify as fixed assets, including buildings, computer equipment, software, furniture, land, vehicles, and machinery. These assets are owned by the business and contribute to its operational capabilities over an extended period.
Current Assets vs. Fixed Assets: It's crucial to distinguish between current assets and fixed assets. While fixed assets are intended for long-term use and provide sustained financial benefits, current assets are expected to be converted into cash or used up within a year.
In conclusion, the proper management of fixed assets is vital for a business's financial health. By understanding their characteristics and significance, businesses can make informed decisions to optimize their long-term financial stability. If you are seeking further guidance on managing fixed assets, consider consulting with a financial professional or utilizing accounting software like Xero, which facilitates easy tracking and management of fixed assets.
